Taken from Henry George, the title of this post refers to economists who make good points but don’t get to their logical conclusion. Mariana Mazzucato may be another. We may start by looking at some of the main themes of her book.

Value extractors are obtaining a large and increasing share of wealth produced, resulting in a smaller share for those who actually produce valuable goods and services. This problem has several interlocking causes.

Measures of national product (GDP) conceive value as equal to price, meaning that any profitable activity adds to national product even if it’s essentially an extraction of value rather than production of good or service of value. In recent decades, opportunities for private value extraction have multiplied.

One effect of this increase in private value extraction is that the extractors now have effective control of much of the government. Lobbying by value extractors changed national income concepts to include their extractions in GDP.

Further, the conventions of national income calculation tend to understate the value of government work. This is because the value of a private company’s production necessarily exceeds, on average, the cost of labor and capital inputs (otherwise the company would have no profit). A government’s production, by contrast, is treated as equal to the cost of the inputs, even if the value of the product is much greater.

Partly as a result of this undervaluation, some services previously provided by government have been “privatized,” which means, in most cases, are still funded by taxes but are performed by employees of private firms under contract.

Some examples of the
problem:

As retirement income becomes based on earnings of assets, pools of assets grow and opportunities for value extraction multiply. This includes fees for managing investments, and various side-hustles.

As governmental functions are “privatized,” the quality of service drops along with the earnings of people who provide the service. But costs typically don’t decline because of contractors’ profits and lobbying expenses.

Patent privileges have been vastly expanded in recent decades. This provides more opportunities for value extraction, but actual useful innovation seems to be retarded by patents. Also, as patent offices have become understaffed relative to the workload, patents become easier to obtain.

Governments (or their banker overlords) seek to reduce the deficit/GDP ratio by reducing spending, failing to recognize that some kinds of government spending actually facilitate an increase in GDP far in excess of their cost.

The dominant neoclassical economic ideas assume that rent can be competed away, and that unemployment is voluntary. They further fail to recognize “the collective and cumulative processes behind innovation.”

The remedy? According to the author:

“We” need to “define and measure” the “collective contribution to wealth creation,” to overcome the “price=value thinking…” and recognize that most of the “…creation of value is collective.”

“We” should also recognize that the current structure of corporations, controlled by shareowners thru boards, with no formal role for employees, customers, and other “stakeholders,” is not the only possible or practical way to arrange things.

The role of governments, as well as nonprofits and cooperative organizations, in value creation needs to be recognized.

Tax laws need to be modified to advantage actual value creators rather than value extractors. In addition to changes in income tax laws, a small tax on financial transactions would be helpful.

Patent laws need to be modified to discourage abuse. To encourage particular kinds of innovation, bounties might be substituted for patents.

Portraying government as “investing, not spending, can eventually modify how it is regarded.” [of course this little trick has been used by U S politicians for many years.]

“We” need to develop a vision of what society needs, and set government priorities regarding infrastructure, services, and regulations to achieve it.

So what is the value
of this book?

It does give some history of concepts of national income, going back to the 17th century and summarizing views of William Petty and Gregory King as well as Adam Smith, the Physiocrats, Ricardo, and (with special admiration) Marx and Keynes. It does discuss rent, mostly in an accurate way. There’s no mention of Henry George, perhaps because this part of the book is euro-centric, or perhaps for other reasons. She does mention some important Americans, including Elinor Ostrom.

It identifies the problem of accumulated privilege, resulting in value extraction, which impedes real progress.

It clearly describes some principal means by which value is extracted.

It taught me a few things about the way GDP is calculated, and the history of patents.

It clarifies that there’s nothing “natural” or “inevitable” about the way our economy is set up; many different arrangements for such components as corporations and patents could work, and some would be a lot better than what we have.

In a description of VW and the “dieselgate” affair, she acknowledges some of the limitations of her proposals.

As a Georgist, I see
two big shortcomings with this book:

(1) Even tho nowadays the value extractors have effective control of governments and other powerful institutions, the author seems to assume that somehow these forces will be overcome once the people come to understand that government really is useful, and that the benefits it provides are far greater than is reflected in GDP. Furthermore and related, there is the assumption that the bulk of government expenditure is good, that government is for the most part honest and reliable. There is also almost no mention of the huge waste on military, punishment, and other expenditures which an honest and efficient government would need to eliminate. So, once proper understanding is achieved, the government will wisely set priorities and provide appropriate infrastructure and services. No method is proposed for accomplishing this, and the alternative of decentralization really gets no attention.

(2) While rent is mentioned, and for the most part correctly characterized, there’s no discussion of how rent can be used to properly fund services and eliminate other taxes. It’s true, of course, that some privileges are best eliminated, but for use of real estate parcels, electromagnetic spectrum, and other natural resources the wise policy in most cases is to allow private ownership but collect virtually all the rent for public use.

And then there are a
few little nits to pick.

She does not like corporations to distribute profits to shareholders. Partly this seems to be because share buybacks are one of the several ways that corporate management contrives to reward themselves excessively, but also she displays a fundamental belief that corporations should reinvest in their business, apparently without regard for whether management believes worthwhile opportunities are available.

“A recent study by researchers at the University of Pennsylvania…” is referenced on page 219, but without footnote or citation.

On page 44 she describes rent as including “what you pay a landlord to live in a flat.” This is inconsistent with the way she uses the term elsewhere in the book, since only part of what you pay to live in a flat is to cover the proportionate share of the land it occupies; much is for use of the structure (capital) and services (labor).

In conclusion, this is a pretty good book for understanding how some means of wealth extraction work and why it poses a danger to the rest of us. It encourages us to consider alternative ways for organizing our communities. But it’s weak on practical solutions.

additional note: Mariana Mazzucato has recently been interviewed regarding this book on Econtalk and Alphachat.

another additional note: Font sizes may appear a bit screwy herein because I haven’t figured out how to enlarge the teeny font that seems to be the default in WordPress lists under the new Gutenberg editor. Someday maybe I will.

I am often willing to complete surveys which appear to have a serious purpose and don’t require too much time. But when I get to the last few questions they are usually something like:

What is your household income?

What is your race?

Something else personal?

Maybe I don’t want to tell you. If you’re a wise survey designer, you offer me an option like “prefer not to answer” or “human”. But many surveys are less thoughtful, so it has been my practice to abandon the survey at that point. I’ve wasted my time and the surveyor gets no information (or maybe they save the truncated survey, I dunno. Probably NSA has it.)

But now I have a new system — random numbers. A spreadsheet can give you one, or get it from a site like this. Or just flip a coin as many times as needed. There’s your answer and it has a random chance of being correct.

So, all you surveyors who don’t provide a “no response” option, your data is crap. Or more precisely, are crap. YDAC. Not my fault.

Perry Willis has a relevant post over at Zero Aggression Project noting that what is now designated as “Veterans Day” originated as commemoration of the end of the “Great War” (subsequently known as World War I). It was intended not to honor those who did time in the military, but rather to remember how wars are usually started by the political class to further their own interests. Wikipedia reminds us that the word “veteran” means “a person who has had long service or experience in a particular occupation or field,” which of course includes a lot of us who never participated in the military. He has a suggestion for renaming the holiday again, too, which I doubt will ever be enacted by any governmental bodies.

Willis notes that “Yes, Veterans Day also includes a solemn remembrance of all the young lives lost in past wars…” but he doesn’t mention that the U S already has another holiday for that.

I personally haven’t had any problem with JP Morgan Chase. I had a CD with a predecessor bank and, when it matured, I retrieved it without difficulty. My real estate tax is paid thru them, and as far as I could tell my payments have been processed as intended. Once upon a time I may have had a credit card with them. But I long assumed JP Morgan Chase is a corrupt organization, because I seem to recall having read various things here and there, and, well, how could an honest bank become so large?

I hadn’t even thought about Morgan Chase’s role in the Madoff affair, but of course it was nontrivial, as documented by Helen Davis Chaitman and Lance Gothoffer on their JP Madoff website (and, one presumes, in their book). They have compiled the information, most of which was floating around the Internet, that “In the past four years alone, JPMorgan Chase has paid out $28,902,150,000 in fines and settlements for fraudulent and illegal practices.” And that, of course, is only the cases where they were caught and unable to avoid prosecution.

“Boycott JP Morgan Chase,” Chaitman and Gothoffer urge. Great idea, and I have done so as best I can. But I need to pay real estate tax, and as long as I live in Cook County it seems I must pay it to JP Morgan Chase. So I wrote Maria Pappas, the County Treasurer, saying

I see from the check with which I paid my most recent real estate tax bill that you are still using JP Morgan Chase to process the County’s receipts. It’s pretty clear that JP Morgan Chase is a criminal enterprise, having paid over $28.9 billion in fines and settlements for fraudulent and illegal practices during the past four years. Why is the County unable to use any less dishonest bank to process payments? Thanks in advance for your response.

And just a couple of [business] days later, I received a response from “Customer Service Department:”

Thank you for contacting the Office of Cook County Treasurer Maria Pappas.

Cook County aims to provide efficient payment processing to the greatest number of taxpayers at the least cost to those taxpayers. Nevertheless, we acknowledge that additional considerations are relevant in the County’s choice of vendors, and we take your concern under advisement.

We hope this information is helpful and thank you for the opportunity to be of assistance.

So, they didn’t exactly say “we are going to boycott JP Morgan Chase because they’re crooks,” but it at least it appears that somebody read and understood my message.

My other recent check processed by JP Morgan Chase was used to pay Illinois State income tax. I suppose I should write somebody (Governor? Treasurer? Comptroller?) with a similar message, but I just assume that anyone responsible for administering a tax on earned income is already beyond hope. Maybe someone else will do it.

Anyone reading this blog might get bored with the number of times I say that Henry George was right, and is even more right today than in his own time. But that’s what I do, and part of the reason for this blog is to provide a place where I can record show up.

Location is [still] everything, says the new book by Prof David R. Bell. When I saw the title, I thought it was about land value and real estate, but no, it’s actually about marketing on the Internet and evidence that location matters, a lot, to marketers working in that [virtual] space. For example, the best initial customers for your Internet business might be those who are relatively isolated and haven’t any local sources for your product. Subsequent customers might be those nearby to these customers, who learn of you thru conversation or by observing distinctive shipping boxes. And, for some reason which Bell does not try to explain, even for virtual goods people are most likely to turn to the geographically closest sources.

It’s a nice book for anyone who studied economic geography and marketing in the dark ages, bringing a few things up to date, but quite accessible to every interested reader.

Then there’s the matter of monopoly over text, part of what’s sometimes called “intellectual property” by those who seek to profit by restricting it. This comes from a fascinating interview with writer Poe Ballantine, well worth a listen in its entirely. Ballantine has found it difficult making a living as a writer, drifting geographically and among relatively menial jobs, mainly in food service it seems. He says that after four books he was still known mainly as “the cook.” But now he has reached the point where he can actually earn a living as a writer.

[starting about 45:35 into the audio]

Q: So your writing is sustaining you financially?

A: The writing is not quite enough, but the appearances, the invitations from colleges and universities are what cover my expenses right now. They pay very well. That’s where the money is; the money is not in selling books, the money is in the universities where people go to get their writing degrees.

So maybe the fighting over copyrights doesn’t benefit the writer? But, at least, sometimes the education monopoly brings about something useful.

I don’t know that this deal was in any way particularly corrupt or dishonest. Maybe the parcel actually quintupled in value over 14 months. Or maybe Drapec really has better “analytical and negotiating skills in finance and real estate” than McPier (or the seller last year, BMO Harris). But there are two things I do know:

(1) The multi-million dollar profit will be paid by everyone who patronizes restaurants in or near the central part of Chicago, where McPier imposes a 1% tax on all meals. To keep the math easy, figure the average fast-food meal costs $5.50, yielding 5½¢ for McPier. At that rate, it’ll take a hundred million meals to buy this real estate. Of course, McPier has other tax revenues, too. And actually, not quite all meals are subject to the tax, since some nonprofit organizations, as well as governmental agencies including McPier, are exempt.

(2) The asserted purpose of McPier is to “strengthen the local economy.” Why should the economy need to be “strengthened?” What are the obstacles preventing people from finding productive employment? Certainly one of these obstacles is taxes, not only the amount of taxes paid but also the difficulty and expence of conforming to all the applicable tax rules and regulations. Another, perhaps more important obstacle, is the vacant and underused land throughout the City. Land can be forced into productive use by collecting its full economic value through a land value tax. Since nothing can be produced without labor, productive use means wages will be earned. That is the way to strengthen the local economy. Of course, under a full land value tax, the selling price of that half-acre parcel near McCormick Place would be nominal, and Drapec would not have bought it unless they planned to begin development promptly.

I am not going to call it “Obamacare” since most of it existed long before we’d heard of that guy, and I am not going to call it “health insurance” since it only applies to medical costs, which have just an approximate relationship to health, and it is not insurance since it is intended to pay routine costs rather than help pay for catastrophes. I suppose I might call it “diversion of productive people’s income to lobbyists and their clients” (which we might pronounce “DOPPILC”), but I’ll just call it “govcare” since it certainly involves the government and has something to do with care.

I really don’t understand it at all. Do we, the People of the United States, wish to pay whatever is necessary in order that all of us may have whatever medical treatment a group of licensed professionals assert is necessary? If so, why do we think it will not absorb 100% of our production beyond subsistence? If not, how do we decide priorities and set limits, when inevitably any limit is going to find someone very sick and very sympathy-arousing unable to afford some treatment which really would be helpful? (The answer probably has something to do with us the People of the United States behaving like adults, but if I was the very sick person in question I might have a different attitude.)

The subject is simply too big for me to comprehend, so I will just nibble around the edges. Today’s nibble is a message I received from the “health insurance” company who take a large part of my income.

Copayments do not apply to deductible or out of pocket.

Or, to put it a different way, if you purchase any considerable amount of medical treatment, what comes out of your pocket is likely to exceed the “out of pocket limit” that “your” “insurance” company proclaims. (This is in addition, of course, to the amount they already took from you to provide what they call “coverage.”

Melissa Kite had a piece in Thursday’s Guardian complaining about the escalating cost of London housing. She starts off well, observing that she can’t earn as much in a year as the increase in the value of her flat. “[W]hat does it say about our society when we can, in theory at least, make more money doing nothing than we can by the sweat of our brow?” Agreed, it’s a problem. So what does she recommend?

In New York, 45% of people live in rent-stabilised accommodation where landlords are limited to increasing rates by a certain percentage each year. This is not rent control – which accounts for only 1% of tenants – but rent with controlled increases, an important difference.

I will wait to hear from New Yorkers about how this has solved their housing problem. Going back to the Guardian article, Kite gets pretty close when she observes that “a British company is selling a flat-pack self-assembly ‘house in a box.’ But she doesn’t take the next step to ask: “If you buy one, where are you going to place it?” The answer, of course, will be that anyone who can afford only the flat-pack house will be unable to obtain a suitable site anywhere near London.

The problem isn’t house costs, it’s land costs. And land costs would be a lot lower if all land was subject to a stiff site value tax, because there could be little or no speculative premium. (To be clear, the cost of obtaining a site for your house, purchase financing plus tax, would be much less if landholders weren’t pricing sites based on their future hopes rather than current usefulness.) This point is readily made, for example here and here. It’s unfortunate that the writer of the Guardian article seems unfamiliar with the concept.

Measuring inflation isn’t an easy matter; I don’t think many of us can even agree on exactly what inflation is. But it’s somehow related to prices consumers pay, and the biggest operation measuring that, at least in the U S, is the Bureau of Labor Statistics’ Consumer Price Index. There are lots of issues with how they measure, and how they report, but one which I haven’t seen discussed regards “loyalty” cards and the value of privacy.

Many retailers in recent years have set up “clubs” of one sort of another to better track their customers. One of the noteworthy exceptions until last year was Walgreens, and there remain a few other respectablemerchants, but nowdays one who chooses not to participate ends up giving up a fair amount of money (or convenience). So does the Consumer Price Index recognize that privacy has a price?

The answer, at least conceptually, turns out to be straightforward. It’s right here in Chapter 17 of the Handbook of Methods. As described on pages 31-32 of this pdf, if a discount is offered only to card users, is temporary (lasts no longer than a month or two), and at least 50% of the sales are at the discounted price, then the CPI recognizes the discounted price. (If the discount is for a longer period, then pro-rata weighting is used.) In essence, if most people give up privacy for a discount, then the CPI doesn’t recognize this as a cost.

At least in the stores I visit, it seems that most folks are quite willing (or economically constrained) to take the discount; anyone who wants to make a purchase under the policies that were in place twenty years ago needs to pay a higher price, which is not recognized in the Consumer Price Index.

This is just a note I write to myself, observing a curiosity about solar panel maker Solyndra, who filed bankruptcy yesterday and were raided by your FBI today. The biggest equity investor in the firm is George Kaiser, with “about $337 million”. Solyndra received a government loan for $527,808,544. OK, so bankruptcy is supposed to mean that loans are repaid to the extent possible, and if there’s anything left it goes to the equity investors.

Not in this case. Somehow, after the loan was made, documents were revised so that $69 million of Kaiser’s money is first in line for repayment, followed by the government loan. Also, Kaiser was a fundraiser for the current President’s campaign, and visited the White House 16 times since the inauguration.

Lately I kind of figured this is how business is done, it is to be expected that major campaign donors will receive substantial favors from those they helped elect. But at least in this case Reuters has demonstrated some interest, and investigations are giving the appearance of commencing.